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Can You Write-off Theft Loss on Taxes as a Result of a Scammer? Not Anymore. Fortunately, There May be Relief Under Another Provision of the Law!

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Can You Write-off Theft Loss on Taxes as a Result of a Scammer? Not Anymore.

 

Fortunately, There May be Relief Under Another Provision of the Law!

 

You can no longer claim theft losses on a tax return unless the loss is attributable to a federally declared disaster. This deduction has been suspended until at least 2026 under the new Tax Cuts and Jobs Act (TCJA) that went into effect under President Trump’s administration on January 1, 2018. This suspension applies to both individuals and businesses.

What Is a Theft Loss?

A Theft Loss is when an owner has been deprived of money or property deliberately. These crimes include:

  • Burglary
  • Blackmail
  • Embezzlement
  • Extortion
  • Kidnapping
  • Robbery
  • Fraud
  • Larceny

In order to be considered ‘theft loss”, there has to be no expectation of the money’s return.

If a taxpayer simply ‘lost’ the money or loaned it to a family member or friend who did not pay back the funds, then these situations do not qualify. However, if the claimant ordered something off the internet, and did not receive the item or a refund, or if money was stolen directly from his bank account, then all of these situations qualify. In addition to what has been listed above, they would be considered ‘theft loss’. Pre-2018 tax reform, a taxpayer would have been able to write them off.

The law has changed under the Trump administration, which in late 2017 passed into law the Tax Cuts and Jobs Act (TCJA). As of January 1, 2018, no longer can a taxpayer deduct theft on his taxes, unless it was due to a federally declared disaster.

It should be noted that these changes are not permanent, TCJA will only be in effect until the end of 2025. Unless further changes are made before that time, the law will again allow for tax write-offs from theft starting January 1, 2026.

What Is an Example of a Theft Loss Deduction?

Here is an example of a theft loss deduction involving fraud. Beverly, a while after losing her husband and in a vulnerable state, gets involved with someone over the internet.  She truly believes that she is in love with this person.  Unfortunately, the person that he believed that she loved turned out to be a scammer and convinced her to take a substantial portion of her retirement and give it to this scammer.  While she filed an FBI report, the scammer was very skilled at covering his tracks.  Long sad story short, Beverly now has a 95,000 tax bill that prior to the Tax Cuts and Jobs Act (TCJA) may have been deductible, giving her some tax relief.   Sad part of this story, the 95K was more than she had left in retirement.

Prior to January 1, 2018, we would have treated this as a Theft Loss and been able to help Beverly with this unfair tax burden.  Until the law changes this is no longer a possibility, so we had to find another solution.  We turned to the Offer in Compromise, Effective Tax Administration.  Below are the requirements for submission under the Effective Tax Administration for an Offer In Compromise;

Considering the Effective Tax Administration Issue

1. If there are no grounds for compromise under the doubt as to collectability or doubt as to liability provisions, a compromise may be entered into to promote effective tax administration when compromise of the liability will not undermine compliance with the tax laws, and:

a. Collection of the full liability will create economic hardship within the meaning of Treasury Regulation 301.6343-1; or,

b. Regardless of the taxpayer's financial circumstances, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance (DVC).

IRM 5.8.11

1. The availability of an ETA offer encourages taxpayers to comply with the tax laws because taxpayers will believe the tax laws are fair and equitable. The ETA offer allows for situations where tax liabilities should not be collected even though:

· The tax is legally owed, and

· The taxpayer has the ability to pay it in full

2. No compromise to promote ETA may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.

3. If a taxpayer submits an ETA offer, first investigate the offer for:

· Doubt as to Liability (DATL), and/or

· Doubt as to Collectability (DATC)

4. An ETA offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under DATL and/or DATC.

5. The taxpayer must include the Collection Information Statement (CIS) (Form 433-A (OIC) and/or Form 433-B (OIC)) when submitting an offer requesting consideration under ETA.

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